R&D tax credits explained

31 March 2019 Scott Burkinshaw Radius, R&D Tax Relief, Business Taxes

Research and Development (R&D) tax credits were introduced to incentivise companies to innovate using the tax system.   Claims are often overlooked because business owners over-estimate the level of innovation required to claim, when all that is required is an appreciable improvement to science or technology.
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  • Claiming can result in tax savings of up to one quarter of the amount spent on R&D qualifying costs.
  • HMRC consistently state that these tax reliefs are significantly under claimed.

There are many myths and misconceptions about what can be classed as eligible R&D expenditure, or the types of activities that qualify.  Here, we aim to look closer at key areas to break this down and take you through;

1. The benefits of claiming R&D Tax Credits
2. Is your Company eligible to claim R&D Tax Credits?
3. R&D Qualifying Costs
4. Qualifying R&D projects
5. Why 90% of business fail to claim R&D Tax Credits
6. How to claim R&D Tax Credits

1. The Benefits of Claiming R&D Tax Credits

Why every innovative company should claim.

  • Eligible companies obtain extra tax relief on R&D qualifying costs.  This extra relief either reduces taxable profits or creates or increases tax losses.  Such losses can usually be sacrificed to HMRC in return for a cash repayment from HMRC.

  • The level of relief is very generous.  An SME incurring £100k of qualifying costs on wages and materials could save in the region of £25k in tax.  How long would it take to generate the sales to produce £25k of profits?

  • Eligible companies can make a claim going back two financial years, so claiming for two previous years can be particularly beneficial for first time claimants.

  • Capital Allowances are available at a rate of 100% on capital expenditure used for research and development purposes.  This gives full tax relief in year one on expenditure which may otherwise only obtain relief at 18% per annum, or in some cases, no tax relief at all until sale.

2. Is your Company eligible to claim R&D Tax Credits?

R&D tax relief can only be claimed by;

  • Qualifying companies (most companies are eligible)
  • Incurring R&D qualifying costs
  • On qualifying R&D projects

For a comprehensive list of criteria, download our R&D Tax Credits eligibility checklist.  It will take you less than 10 minutes to determine whether or not you can claim.

Eligibility checklist

Your Eligibility Checklist

3. R&D Qualifying costs

R&D tax credits are highly beneficial, yet we often find confusion over what can be included in the claim as not all costs associated with an R&D project are eligible. It is therefore crucial when preparing a claim to correctly identify the qualifying costs.

Expenditure must be incurred on any of the following:

  • Staff costs (including certain reimbursed expenses, employer
    NICs and employer pension contributions but not benefits in kind)
  • Power, water and fuel used directly in the R&D process
  • Consumables used directly in the R&D process (e.g. tooling, raw materials and prototypes)
  • Computer software
  • Costs of subcontracting R&D and / or externally provided workers such as agency staff.  Relief is available at a reduced rate on these costs.

For more details on whether you expenses qualify, why not download our guide to Qualifying R&D Costs.

4. Qualifying R&D projects

Guidelines

The definition of R&D for tax purposes is probably wider than you think. Any kind of innovation could potentially qualify and isn’t just restricted to technicians in laboratories.

If you are paying people to solve technical problems then there may be scope to claim.
Qualifying projects aim to advance the overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainties.
Such projects may create or appreciably improve a process, material, device or product.

Expenditure incurred on abortive projects can still qualify.

5. 90% of businesses fail to claim R&D

The government wants businesses to claim.  R&D tax reliefs are government backed reliefs, yet HMRC's statistics show that many businesses fail to claim.  This could be due to:

  • a lack of awareness
  • a lack of time to complete the claim themselves
  • overestimating the level of innovation required
  • a fear that claiming might give HM Revenue & Customs (HMRC) the opportunity to start asking unwelcome questions, or
  • in larger companies, claims can be missed where the finance team, who have knowledge of the R&D reliefs, aren’t close enough to the technical staff and so they don’t think their company ‘does’ R&D

Shorts have developed a focussed three step approach to quickly determine whether your businesses is eligible to claim, and take you through the claim process.  

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1. Initial Discussion

30-60 minutes, either in person or over the phone to explore whether a claim is possible.

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2. Technical Meeting

We meet with you to identify qualifying projects and costs to include in the claim.

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3. Produce Claim Documents

We work with you to maximise the claim within the scope of the legislation. We produce the technical report and a summary of R&D qualifying costs that is required to support a claim.

You review it and when you’re happy, we’ll submit the whole claim to HMRC for you.

You'll then receive your tax savings from HMRC - up to a quarter of the amount you've actually spent on innovating.

6. Shorts’ Radius Team 

Shorts’ Radius team comprises of dedicated tax professionals who specialise in providing proactive and quality tax advice to innovative businesses.

We have a proven track record in advising innovative businesses on R&D and Patent Box Tax Reliefs, saving them millions of pounds in tax relief and ensuring local businesses claim their full entitlement to these government backed tax reliefs by:

  • implementing a process developed from years of experience working on R&D tax reliefs which quickly and concisely assesses a company’s potential eligibility before painlessly completing the process
  • correctly identify the R&D qualifying costs
  • helping companies maximise the benefits available, whilst submitting technically robust claims 
  • ensuring each claim demonstrates compliance with HMRC guidelines before the claim is submitted

Like to find out more?  Why not download Your guide to making a successful claim for R&D Tax Credits or speak to a member of the Radius team.  

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